Anomalies in the U.S. vegetable oil market – history of vegetable oil export assistance

Anomalies in the U.S. vegetable oil market – history of vegetable oil export assistance – U.S. Dept. of Agriculture, Economic Research Service report

Roger Hoskin

The U.S. produces nearly 40 percent and consumers on average 35 percent of the world’s soybean oil. Yet despite the ability to produce sufficient oil for domestic consumption, the U.S. became a net importer of vegetable oils in 1990, and actually began importing small amounts of soybean oil in the mid-1980’s.

Developments in recent years in the U.S. vegetable oil market – particularly in soybean oil – can be explained partly by the changing objectives of U.S. export programs, as well as developments in foreign markets. The U.S. government has provided assistance for exports of vegetable oils, mainly soybean oil, since the early 1950’s.

A History of Veg-Oil

Export Assistance

At varying times, U.S. export programs have reflected humanitarian, diplomatic, and financial goals, with a key objective being the development of foreign markets for U.S. agricultural products. For example, in 1954 it was the “Food for Peace” program, now known as P.L. 480, that ushered in the era of U.S. government support for exports.

Prior to 1955, soybean oil exports were small – soybeans did not take hold as a major U.S. crop until well after World War II. The P.L. 480 program helped boost U.S. soybean oil exports from just 50 million pounds in 1954 to over 550 million pounds a year later. By 1965, soybean oil exports under P.L. 480 had risen to 1.35 billion pounds.

During the 1950’s and 1960’s large stocks of most agricultural commodities accumulated in government storage. For soybeans, however, strong growth in domestic and foreign demand during those declares kept soybean stocks low and stimulated production. Exports of soybeans and soymeal went mostly to Western Europe, with its rapidly expanding postwar economies. Sales were on a cash basis, and government involvement in those sales was minimal.

But the vegetable oil market did not benefit from the same strong market conditions as soybeans and soybean meal. While global demand for vegetable oils did rise during this time, supplies often outstripped demand, generating surpluses.

U.S. concessionary programs boosted sales to countries in the developing world that would not otherwise have the means to purchase oil. Under concessionary programs, USDA provided direct credits at close to commercial rates for sales of vegetable oil and other agricultural commodities from 1956 through 1980. In these years, USDA’s Commodity Credit Corporation (CCC) assisted exports of about 2.4 billion pounds of vegetable oil.

Export Assistance

Recedes in the Seventies…

The 1970’s was a decade of growth in U.S. agricultural exports. While P.L. 480 and credit programs still played a role in export sales to developing countries, the decade was marked by less government involvement in agricultural exports in general, and vegetable oil in particular. By 1979, a year when exports of U.S. vegetable oils reached a record 3.75 billion pounds, government assistance of all kinds covered only about 25 percent of the total.

A number of factors contributed to the growth of U.S. agricultural exports in the 1970’s. One of the most prominent was U.S. abandonment of the fixed exchange rate, which enabled U.S. farmers to become price-competitive in world markets. Rising incomes in many countries also boosted demand for food and helped stimulate U.S. commercial agricultural exports.

By the early 1980’s, increasing export demand for vegetable oil began to stimulate oilseed production in other parts of the world. Many countries adopted policies that encouraged the shift of land and other resources into vegetable oil production. Output expanded in South America, the European Community (EC), China, and India. Malaysia and Indonesia also become major vegetable oil producers in the 1980’s.

EC vegetable oil production in particular expanded substantially. Between 1980 and 1990, EC oilseed production expanded from 3.2 million metric tons to over 13 million tons. Much of the growth was the result of government policies that encouraged production – some intended to offset burgeoning EC grain production. EC support prices for oilseeds were substantially above world prices throughout the 1980’s, particularly after 1984 when world prices declined sharply.

…Re-Emerging in the

Late Eighties

In an environment of rising foreign production, in some cases subsidized, U.S. export programs again began to play a prominent role in U.S. soybean oil exports. As U.S. exports declined in the 1980’s, the share of government-assisted sales climbed. In 1985, the Export Enhancement Program (EEP) was authorized to improve the competitiveness of U.S. agricultural exports and to counter subsidized foreign exports.

With the EEP in place, government- assisted vegetable oil exports rose to 65 percent of total vegetable oil exports in 1986/87. Still, U.S. vegetable oil exports – although benefiting from more government assistance – continued to sag, while world vegetable oil trade expanded.

Then, from 1987 to 1989, U.S. vegetable oil exports again began to climb, with the proportion receiving government aid reaching nearly 66 percent by 1987/88. In that year, vegetable oil exports were the highest since 1981/82. For 1991/92, soybean oil exports are forecast at 1 billion pounds, but government assistance will be necessary to reach forecast exports.

U.S. Consumers

Buy Canola

While U.S. vegetable oil exports increased with the help of EEP and other government assistance, the U.S. managed to become a net importer of vegetable oil in 1990. The U.S. traditionally has imported significant quantities of some foreign vegetable oils, such as palm kennel, coconut, and olive oil. The imports are generally oils that the U.S. either does not produce or produces only in small quantities. But recently, the U.S. has imported small quantities of soybean oil, and growth in Canadian rapeseed oil imports (canola) – a direct substitute for soybean oil – has increased substantially.

These patterns of imports and consumption are partly related to the characteristics of the U.S. soybean and vegetable oil market, and partly to the effects of export assistance. Although the U.S. is a large soybean producer, its total vegetable oil exports, including soybean oil, represent a small share of world trade. Between 1987 and 1990, U.S. vegetable oil exports made up only about 6 percent of world trade in vegetable oils.

To the extent that government assistance boosts the volume of U.S. vegetable oil exports, this may have a greater impact in raising domestic oil prices relative to world prices. However, even with government assistance, the volume of U.S. vegetable oil exports is probably not largely enough to be a significant influence on the world price of vegetable oils.

The U.S. soybean oil base price, known as the Decatur price, was lower than the European Rotterdam price before 1985. After 1985, however, Decatur soybean oil prices have been consistently higher than Rotterdam prices, with the exception of the most recent few months.

As a result, domestic consumers have begun to substitute low-priced imported oils for relatively higher priced domestic soybean oil. The U.S. does have a 22.5-percent ad valorem tariff on foreign soybean oil imports, and somewhat lower tariffs on other vegetable oils. But canola – Canada’s edible rapeseed oil – enjoys one of the lowest tariffs of any vegetable oil.

Prior to 1985, canola could not be consumed as a food item in the U.S. The Food and Drug Administration finally granted GRASS status (Generally Recognized as Safe Substance) to canola in January 1985. The recent U.S.-Canada Free Trade Agreement lowered canola’s tariff to 3 percent, and in January 1992 the tariff will be removed entirely.

U.S. imports of canola from Canada have increased sharply over the last few years. While canola’s low saturated fat content likely encouraged growth in domestic consumption, price competitiveness with U.S. soybean oil has probably also helped boost canola consumption’s share of the U.S. market.

Who Benefits from U.S.

Export Assistance?

Several groups are effected by export assistance for vegetable oil – U.S. farmers, processors (in the case of soybeans), U.S. consumers, foreign consumers, and foreign vegetable oil exporters. Although an exact measure of benefits to various groups depends on a thorough economic analysis, some of the factors that determine benefits for affected groups are raised here.

If export assistance for vegetable oil stimulates or maintains oilseed production, or results in higher farm prices for oilseeds, U.S. farmers would benefit from the stronger demand or prices. In the case of soybeans, processors may benefit if export assistance for vegetable oils means more soybeans are crushed.

The benefits to U.S. consumers depend on the availability of soybean oil or other vegetable oils, as well as relative prices when export assistance effectively shifts the sale of oil to export markets. If domestic production is diverted to export markets, and domestic soybean oil prices rise, U.S. consumers can escape higher prices if cheaper substitutes are available for consumption.

COPYRIGHT 1991 U.S. Department of Agriculture

COPYRIGHT 2004 Gale Group